Brazilian payments company Ebanx, which had already started the process of going public, decided to postpone its IPO in the United States, as reported by Bloomberg. The fintech company said it “remains attentive to the best market timing for an eventual IPO.” The move comes in a difficult window for IPOs of tech companies, as the market has reduced the present value of the company by the trend of falling profitability in the future. Added to this is the political instability in Brazil due to the presidential elections this year.
But a difficult window is not just a problem of today. Since last year, investors have adopted a less optimistic view of fintechs’ shares. Worried about the valuation, Brazil’s PicPay, which would make its stock market debut in 2021, also postponed to ring the New York bell. Even Nubank, which went public 56 days ago as Latin America’s most valuable financial institution, has already lost more than 30% of its value since the IPO, even though it is usual for companies to depreciate after their first day on the stock exchange.
Uruguayan fintech dLocal, which went public in June last year at a valuation of $9 billion, had a market cap of $8.37 billion in February. VTEX, a Brazilian technology company that debuted on the NYSE at a $3.6 billion valuation, has also skidded. This month the company is worth $1.46 billion, according to the Companies Market Cap indicator.
For Fabrício Winter, partner at Boanerges&Cia, a consulting firm specializing in financial services, “the market is undergoing a major adjustment.” He explains that the economic crisis scenario reduces the value of shares, especially of companies that count on the “Brazil risk”.
“We are entering a political year, which ends up generating more insecurity, and investors end up leaving these businesses more easily,” Winter said. Even so, the analyst believes that the market is already pricing in the worst-case scenario and that these elements of the market cause “many good companies to be placed in the same package of companies that are showing signs of problems in the business model.”
This could hurt the IPO of Brazilian unicorn candidates to go public this year like Creditas and QuintoAndar, for example. “It could be that we have companies going public this year, but because of the economic scenario, it could be that they are undervalued, even if they are profitable companies. We need to look at what these companies are today and the future of these companies since the market works in this evaluation process with expectations of future earnings”.
Better for those who can hold on to the private market
Ebanx said it grew more than 110% in the volume of payments processed in 2021. Last year, the company received a $430 million investment from Advent International.
Paulo Passoni, one of SoftBank’s partners in Latin America, recently posted on LinkedIn that this year’s “Bear Market” is similar to that of the 2000s, driven by US monetary policy.
According to him, investors need to be patient as assets can get much cheaper. “In 2000 and 2008 the capital market crisis lasted about a year. As the world is moving faster, it might last less,” he wrote.
Passoni advises founders that “this is not the time to raise capital [on the stock market] unless it is necessary or the company has incredible numbers.” Carlos Naupari, the co-founder of VELVT, a company that promises liquidity for startups, adds that “the private market raises twice as much capital as the public market, but is 330 times less liquid.”
“We are in a moment of turbulence in the global market. It is a time of uncertainty and after the company does the IPO it is another type of market with a different ruler than the private market,” Naupari said.
Another analyst heard by Bloomberg Línea, who preferred not to be identified, said that the expectation of rising interest rates in the United States impacts those companies that have a portion of their value tied to a future value.
He explains that higher interest rates hurt companies that are still growing and that do not necessarily generate cash, but an expectation.
Private rounds may be an option to replace the IPO for companies that need cash, but for the analyst, companies with great quality will continue to have access to the capital market, regardless of the Brazilian electoral process. “A company that shows it can achieve exponential growth regardless of the economic and political cycle, with good product, service, and addressable market, will succeed,” he said. The biggest challenge, according to him, is for companies that are not so big.
Interest rates: the name of the problem
BR Finance partner Osias Brito explains that since interest rates are the great price levellers in the world’s economy, when they increase, investors usually withdraw resources from variable income and allocate them in fixed income. The equity investor, who invests in the IPO, for example, seeks a higher return. But with fixed income pegged to the basic interest rate of 10.75% [in Brazil], there is competition with the capital markets, where assets are riskier.
This impacts companies that have their structure on the stock exchange and that raise money from the market, as this money will come at a higher cost and with greater selection. “The name of the game for those going public is growth. If the company has relevant growth, it still has room to go public,” Brito said.
As most technology companies operate on negative cash flow, their value lies in the perpetuity of the technology. “With the rapid increase in interest rates, you have an increase in the cost of capital. The cost of capital is a deflator to bring future flows into the present. For most companies, that represents 20% to 30% in the reduction in the price of it.”
In other words, the discount in the value of the company is higher because the ability to generate future results is lower. “With high interest rates, the technology company does not have enough capital to give flow to the accelerated growth. The growth that these techn companies promised when they went public is compromised if that company does not raise new money. So analysts bring the present value for that company, which automatically reduces the capacity for growth.”
If the company grows a lot, in a market with high interest rates, it costs a lot more for it to continue growing, according to Brito. Reducing the speed of growth is the analysts’ strategy in this case, but the increase in the cost to bring to present value explains why the market value of Facebook, Nubank and Netflix have recently fallen, for example.
“It’s not because Nubank is good or bad. It’s because its ability to deliver the speed it promised is compromised by a feature that has become more expensive. You have to modulate speed, and when you reduce speed your economic value reduces.”
But who can survive the Bear Market? For Brito, those with very high profitability are “protected”, such as companies that serve the upper classes, who don’t need credit to consume, for example. “That’s why in a crisis Louis Vuitton doesn’t fall. Ferraris still sell. Because this public is self-financing.”